Category: Lloyd’s favorite posts

There was a very interesting, and entertaining article in the November 2011 issue of the Harvard Business Review about what businesses can learn from organized crime. Without restating the article (I recommend you read it), I thought it would useful to apply the lessons for the benefit of social gaming companies.

Use the news to create opportunity

In the HBR article, they point out that criminal groups are very effective at scanning the macro-environment and capitalizing on what they find. Major events, both locally and globally, are great opportunities to build interest in a social game, create new monetization opportunities or improve virality. By tying into news events, a social game company can leverage all the interest and buzz around a current event. These events can range from a big sporting event (e.g., World Cup or Super Bowl) to a big news item (a lost drone, the European debt crisis) to a natural disaster (the Japanese tsunami). With a big positive event, there are opportunities to sell special limited edition virtual goods or creating particularly compelling wall posts and other virals. In the case of a disaster, social game companies in the past have increased engagement (and benefitted victims) by donating the proceeds of special virtual items. For some reason, this practice seems to have ebbed recently.

Outsource to specialists

Rather than doing everything internally as in the “Godfather” days, modern organized crime has created a loosely affiliated cooperative network (think freelance thugs or hackers). For social game companies, there is a great opportunity to move their user acquisition to agencies (such as TBG), to have contractors help analyze their data, to generate more revenue by using international publishers (such as Plinga and Pixonic), etc. Rather than find a team of several hundred, with (at least) some of them not being the best in the field, you can outsource multiple functions to great partners.

Cash isn’t the only incentive

Although criminal organizations pay well (or at least that is what I hear), one of their strongest recruiting tools is the thrill tied to their activities. While deploying a new content pack may not release as much testosterone as robbing a bank, by creating a challenging environment for your employees where they feel they belong goes a long way to retaining your top performers and attract others.

Exploit the long tail

Global criminals reap big profits by executing small operations repeatedly. Rather than trying to create the next Cityville, think about building an iOS app that can repeatedly reskinned (maybe capitalizing on a current event). Another option would be a niche Facebook title that can then be launched in territory after territory, social network after social network. The point is that rather than going for the huge win, look at creating a series of small successes that may be easier and in the long term more profitable.

Collaborate across borders

Think of Al-Qaeda and how it works with splinter groups across Asia and Africa. In the social gaming ecosystem, there are many opportunities to partner with other companies to increase global revenue. You can find a French, German or Chinese game company and generate revenue by licensing your game to them for their territory. Conversely, you can look to foreign companies to acquire content you can then publish in your home market to augment your product line-up (and generate more revenue and traffic). You can even partner with a competitor who may have a presence in a market that is not in your focus to bring your product there. Organized crime, and organized business, is littered with entities that compete in one region while cooperating in others.

As I mentioned, the underlying article in HBR is really eye-opening and provides a great framework for building a social game company. I hope some of the opportunities I highlighted above help social game companies build their business (without knee capping anyone).

Next week, I am speaking at the Social Gaming Summit in London about moving Beyond Performance Marketing. I wanted to share the driving principle as I think it is quite important for everyone in the social game industry, from small start-ups to the largest players.

There are several reasons why relying on performance marketing (Facebook ads) is untenable for social game companies. First, the cost of Facebook ads for social games in the US increased 300% in less than two years. In January, 2010, the median CPC for a Facebook ad was about $0.50. In April of this year (the most recent data that I have), that number increased to $1.50, with several spikes where ads cost almost $2.50. This number is almost certain to continue increasing at a rapid rate, as Facebook ad budgets are projected to rise from $2.1 billion today to $8.3 billion by 2015. With budgets increasing at this rate and the cost of Facebook ads based on a bidding system, the increased demand (without an increase in supply) has to increase the cost of ads. Given that ARPDAU (average revenue per daily active user) is not rising at anything close to this rate, it will become impossible for most social games to justify spending significantly more on ads. Finally, for several Facebook games there just is not anyone left on Facebook to advertise to. Some of the major players have spent so much promoting their games through Facebook ads that all potential customers on Facebook are numb to the ads, they have either played the game or never will.

What this situation suggests is that companies need to find other ways of attracting and re-engaging players. The first step is for social game companies to create a robust launch and marketing strategy that encompasses not only performance marketing but a complete marketing mix. Given that almost every other industry – including other parts of the entertainment and gaming space – pursue a comprehensive marketing plan, it is logical that social gaming companies also evolve their customer acquisition strategies. Later this month, I will post some suggestions on ways to build out your marketing strategy.

One of the great opportunities for social game companies is to jettison their focus on so-called “whales” and embrace a comprehensive strategy of customer delight for all customers. Such a strategy would increase the monetization base from a scant 3-5 percent of your customers, enhance ARPPU (average revenue per paying user) for all paying users and improve loyalty.

Why the Focus on “Whales”

Currently, most major social game companies are focused on “whales.” First, I want to define “whales” and tell you why I hate the phrase. In social gaming parlance, “whales” are the one percent or less of a game’s players who generate the bulk of the revenue. The amount that defines a “whale” differs by company and game, but let’s say a player who spends at least $1,000 in a game would be considered a “whale” by company X. Given how much these customers spend in a game, getting them to increase spending by a few percentage points has a very powerful effect on overall revenue, while focusing on moving non-payers to becoming payers (many of whom would only spend a little even if successful) does not have the same immediate impact. Thus, most monetization analysis and testing is aimed at getting these “whales” to spend more.

As an aside, I consider the phrase “whales” very damaging to our industry. These are, by definition, our best customers. Most people, however, do not like being referred to as a whale. The term is both condescending and derogatory. If I was a big spender in a game and learned that the company called me a “whale,” I would probably say F…k them and not spend another penny in any of their products. Even if the term is only used inside the industry, players often read industry blogs and sites to learn about the games they love, so they hear what you are calling them. Moreover, it creates inside the game companies a culture of trying to take advantage and trick their best customers. It also implies there is no reason to treat other customers well, and that often manifests into poor customer service for the majority of a game’s players.

On a tactical level, this is a bad strategy because your highly valued customers (I will never call them whales) are put into conflict with the company. They are trying to optimize their experience; you are trying to get as much pocket share as possible. Long term, they are more likely to go to another game where they feel respected (just as you would leave Bloomingdales if you get a condescending sales person and go to Nordstroms); would you stay in a retail store if the salesman calls you a “whale.”

Customer Delight for All Customers

More importantly, the companies that will thrive in the social gaming space (and in virtually any industry) are the ones that create customer delight for ALL of their customers. Amazon and Zappos dominate their space because they create a great experience for everyone, from the person who starts by buying one pair of shoes a year to the person who spends $5,000 a month. They all get great customer service, value pricing, etc. That is not to say they do not reward their loyal/high value customers but they provide great service to everyone. It is also the way that companies turn casual customers into high valued customers. If people feel great about a company and product, they are more likely to spend, and then spend more.

This post is not about how to create a great customer experience (maybe in a few months when I get writer’s block); and it will be different for different companies. The point I want to make is that one of the largest, primarily untapped lever to increase your profitability and long-term market position is to create a gaming company that provides great service to all your players.

A few months ago, I wrote about my feelings regarding the best opportunities on mobile for social game companies, particularly how I saw the iOS vs Android battle playing out (https://lloydmelnick.com/2011/06/30/ios-vs-android-the-battle-for-social-mobile-gaming-supremacy-lessons-from-history/). That post has led to a larger conversation, how should social game companies prioritize the various mobile and web social opportunities. Having been in the game business for almost twenty years (contributions accepted in lieu of condolence cards), I have seen my share of companies fail because they missed a migration to a new platform or get rich as they anticipated a platform change early.

My philosophy is that you should focus on being nimble and ready for new platforms rather than trying to anticipate the future. I have the same attitude towards financial analysts; they are no more likely to anticipate the future than monkeys throwing darts at a dartboard. Some will get lucky but most will underperform the mean over time. It’s the same in the game industry. It is actually quite arrogant for you to feel you know the future better than other tech leaders, so instead of trying to outsmart them, out hustle them.

The Options

Some of you may be asking why is this even an issue, Facebook is the big kahuna and you can make a lot of money being successful on Facebook. Yes, yes you can. But should that be your focus, or only focus, for 2012, for 2013 and beyond. Mobile is clearly becoming a crucial area for consumption of social media. Facebook itself is being accessed by over 350 million users a month via mobile devices. Social games on iOS are regularly among the top grossing apps. Even on the Web, Google+’s growth has exceeded all expectations (most recent figures put it at over 50 million users) and some social games are already generating more revenue on Google+ than their Facebook equivalents.

Looking at 2012 and beyond (which is the release date for any good game recently green lit), the decision becomes even more difficult. First, do you develop for Facebook. Although the biggest opportunity, there are well over 500,000 games and it is VERY expensive to rise above the noise. The next decision is whether to develop for the other web-centric social networks. The most obvious of these is Google+, whose growth has been phenomenal but staying power is still uncertain. Then there are the non-US social networks. Do you try to enter the Asian markets through RenRen, DeNA, Cyworld, etc., where there are more potential players than you have in the US? Do you risk the three-headed social monster in Russia – Odnaklassnike, Mail.ru and vKontakte – where piracy is still rampant but some games earn more than comparable Facebook titles? Should you spend time with the European social networks that are still battling Facebook, and often winning in their territories, like VZnet, Hyves, Nasza Klasa and Tuenti?

Mobile represents the same level of challenge. iOS is clearly the leader right now in the mobile space, but they you also develop for Android? This is a bigger challenge than just adding another social network, as Android develop entails optimizing for a myriad of devices with different displays, sizes, processors, etc. So even if you are developing for Android, you then need to pick the devices. Should you focus only on optimizing for the Fire, betting Amazon will be the main challenger to Apple, should you support the Samsung line of phones and tablets, should you go even broader?

I would argue also that the mobile decision is not simply Android versus iOS. Although a small part of the market now, Windows phones have a potentially bright future. Microsoft’s Nokia deal ensures these phones will get a huge opportunity, especially in Europe where Nokia is still a big dog. Counting out Microsoft and Nokia is still a huge risk. Despite the well documented woes Research in Motion(the Blackberry manufacturer) has experienced competing in the smartphone market, they still have double digit market share, global strength especially in the corporate sector and a lot of seasoned mobile executives. Again, you are taking a risk assuming they cannot turn it around. And finally, let’s not forget HP and WebOS. The TouchPad was obviously initially a failure, to the point of it getting “cancelled” and the CEO being fired, but the surprising demand for it at a lower price point may have changed the game. HP, the world’s largest seller of PCs, still has tremendous distribution worldwide, low-cost manufacturing expertise and the WebOS (formerly Palm) operating system that has been critically acclaimed. With Meg Whitman at the helm, it is too early to write HP off, either.

What to Do, What to Do

As I said at the start of this post, it is folly to try to predict the future. It is an even greater folly to rely on me to, so if I said develop for Google+, iOS and WebOS, your best bet would be to run away and delete your bookmark to my blog.

Instead, you need to shape your platform and development strategy to reflect this evolving landscape. If you have five games under development, do not focus them all on the same one or two platforms but provide options so you are protected if the environment shifts dramatically. If your company’s strength is Facebook, for example, have all products developed for Facebook but have one include a Google + version, another include an iOS SKU, another include Android and Windows, etc. The important feature here is diversifying your risk rather than betting you know exactly what the landscape will look like in the future.

On the development side, ensure the games are built to be ported easily to other platforms. I have worked on projects where development was poorly documented and so much was hard coded that we literally had to hire a team of hackers to reverse engineer the game to get it on another platform. This not only adds to your costs but slows your ability to adapt to market changes, so competitors get on the platform before you do. Instead, put in the time initially (which actually is not much time) to ensure that your products are well architected and easily modified for other platforms.

There are two final points I want to make on this post. First, do not try to alleviate the platform risk by developing for ALL platforms. That strategy guarantees you make multiple mistakes (i.e. developing all titles for a dead platform) and increases your cost and development time significantly. You can achieve the same expected ROI by creating a smart portfolio and moving quickly as the market evolves. Second, make sure your decisions are not US-centric. There is a huge market outside the United States and by looking at opportunities on a global, rather than San Francisco, perspective you increase your potential market and lower your risks

Summary

Although this post was a little longer than I would of liked, the importance of properly incorporating platform decisions in your strategy can mean the difference between success and failure. Make sure you look at all the options, both on the web and on mobile devices, and rather than trying to guess which ones will succeed create a portfolio that ensures success regardless. And build your products so if you are wrong, and everyone is at some point, you can quickly adjust and not even have to admit you were wrong.

The news last week about Netflix losing a much greater number of subscribers than anticipated reminded me of how arrogance can undermine any company, including the high fliers (present and future) in the social gaming space. Let’s start with the Neflix case. With NetFlix, almost everyone outside the company foresaw the ferocity of the negative reaction to its new pricing strategy. Nor was this reaction really a secret once the new pricing was public, Facebook, Twitter and traditional news sites were rife with stories about how unhappy Netflix customers were. Yet Netflix felt subscriber losses would be minor and people would forget quickly about their anger. Although they may still claim that they anticipated the level of customer loss, it’s obviously not the case. The company has lost more than 40 percent of its value since making the pricing move, very few companies actively trying to destroy more than a quarter of its shareholder’s equity. Moreover, if they really felt it was unavoidable, they would of better prepared the market for the losses, as markets dislike surprises more than they dislike losses.

So how did Netflix make this major miscalculation? It happened because within Netflix management confused high customer satisfaction with loyalty. Users loved Netflix because they were getting a good product at a good value. They did not love Netflix because of the pretty red envelopes or the neat logo. Thus, when the value proposition changed, people had no reason not to look elsewhere and did. Again, something that was obvious to outsiders immediately when the new pricing was announced was completely missed by the people making the decision, destroying billions of dollars in value and potentially weakening NetFlix’s market share where it will never recover what it previously had.

What is particularly interesting is that last week there was another piece of business news that reflected the same phenomenon. Research in Motion (RIM), the maker of the Blackberry, also missed significantly its projections, particularly on its Playbook tablet. RIM, like Netflix, dominated its market for years and had a huge level of customer loyalty. Even when Apple came out with a phone consumers loved, RIM both publicly and privately felt it would never lose its core market, business users. They did not look closely at the merits of the Blackberry line against the iPhone, they seemingly just felt that their customers were to loyal to ever switch. When they launched their first tablet, they did not put out a product that had either a feature or price advantage to Apple, but again felt they would succeed because Blackberry users would buy anything they tried to sell. WRONG. Again, consumers showed they are loyal to a good product and a fair price, but when that equation is broken they will switch.

One last point is that this phenomenon did not start (or end) last week. The history of business is littered with once-great companies that failed to deliver continuously a stream of superior products and found themselves fall from greatness to mediocrity and often to bankruptcy. Just to name a few, Sony with the PS2 to PS3 (on the B2B side, they treated developers awfully when they were on top of the world and on the consumer side they put out a product that was not priced competitively), General Motors from its heyday to its transition to Government Motors, Real Networks when it saw a dominant position in the casual gaming market collapse, Sears when almost every family shopped there rather than a store that ended in mart, and on and on and on. All of these companies believed they had a lock on the consumer and could continually erode the value proposition (or fail to deliver the higher value competitors were).

The social gaming space is evolving in a way that it will be very easy for companies to make the same mistake. A lot of the high flying companies now feel they own their customers. Coupled with a strong desire to make their numbers look better, this belief often translates into eroding the consumer’s value proposition. I am saying this on the web side of social gaming (Facebook as well as European and Russian social networks) and even on mobile social gaming, which has only been around awhile. If you are at one of those companies, beware, as you can destroy your relationship much faster than it took to build it. If you are at one of the fast growing companies also beware, when you get to that dominant position, remember what got you there and treat your users accordingly. It’s not only good for them, it is the only way to thrive.

I have lamented several times on this blog that social game company do not use analytics enough outside of monitoring and improving the actual games and monetization. I thought it might be useful if I posted some suggestions on other areas where game companies could apply analytics.

Marketing (non-performance). Social game companies are famous for how well they use analytics to optimize their performance marketing campaigns, i.e. Facebook ads. Despite ad budgets that rival those of FMCG (fast moving consumer goods) companies, however, social game companies have a very unsophisticated approach to traditional marketing (if they are even pursuing these opportunities); a billboard does not a marketing campaign make.

There are many analytic tools available, starting with SAS, which allow companies to optimize their marketing investment. They help direct resources to the appropriate marketing channels and adjust the deployment based on results. These tools also allow for near perfect execution of campaigns by using predictive analysis to put the right offer or messaging to the precise customer at the correct time. They help companies adapt instantly to customer interactions, making adjustments in real time between different marketing platforms. These tools work across television, print, web (banner), outdoors, PR and all marketing tools, allowing social game companies to create marketing campaigns as or more efficient than performance marketing alone. As it is getting more difficult (and costly) to acquire Facebook users with Facebook ads alone, creating an analytics driven marketing program is necessary for social game companies to grow.

Growth opportunities. Analytics are also a fantastic tool for evaluating growth opportunities. With all the data that social game companies already acquire, they can then mine this data to find opportunities others have missed. There are multiple tools that allow game companies to use this data for forecasting profitability of new initiatives. New products, new markets, new platforms, etc can all be evaluated analytically and ROI estimated rather than having strategic direction come from the last person standing after an eight hour Board meeting.

Intra-company. Finally, analytics are a great way to align everyone in a game company with a common interest. By making player data available to everyone, the data can drive all business decisions. If your company tracks, measures and shares results across all channels and business units the data provides the tool to optimize decision making. In addition, providing this data allows for a consistent customer experience (for example, between a Facebook game and a social mobile app) and multichannel marketing with a single view of the customer across all marketing and business functions.

I have not tried to create an exhaustive list of how you can be using analytics to drive growth, but I wanted to touch on some key areas and get people thinking that analytics is not just for improving monetization 5 percent in a month. At its best, it provides a competitive advantage when applied across the organization.

I have been asked on two separate occasions recently whether the social gaming wars were over; if it was impossible for a new entrant to compete. I answered intuitively that it was far from over, there were still many opportunities ranging from social mobile to targeting underserved niches. Unfortunately, I did not have any data to back up my proposition, and as I rely on analytics to drive decisions, that absence troubled me. I also understand that my intuition is not always going to be right, so finding data on this topic became crucial.

In the most recent issue of the MIT Sloan Management Review (Summer 2011), I found the evidence. They reported that 3.8 years is the average length of time before a switch in market share leadership in high-tech markets (that they studied). Out of 19 markets studied, market leadership ranged from 2 to 5.5 years and in 10 of the 19 markets there were multiple switches in market share. In the article, titled ”How Quality Drives the Rise and Fall of High-Tech Products,” the data clearly shows that product quality drives these changes in market leadership. Out of 34 total changes in leadership, 18 percent were driven by changes in quality leadership that year and 50 percent were related to a switch in quality leadership in prior years (another 20 percent was companies who always had superior products gaining leadership). Thus, 88 percent of all changes in market share leadership in high-tech companies was driven by a superior offering from the “underdog.”

The authors of the study also pointed out two key reasons that once-invulnerable companies lose their leadership position. The first is that in high-tech industries new products and technologies constantly flood the market, upsetting the status quo. Secondly, consumers of high-tech products often rely on experts or informed consumers who have reviewed the products. These two factors offset the network effects that come with market leadership.

This research confirmed my (and many others) hunch that the social game ecosystem can still change dramatically. Obviously, there will always be exceptions to the rule, but the data clearly shows it is premature and inaccurate to assume that the social gaming ecosystem cannot change dramatically.

It also points to the need to focus more on product quality than first mover advantage, as the latter does not create the long-term advantage many believed. Most importantly, there is still a lot of profit (and fun) left in the social gaming industry.

My pet peeve this week (and it wouldn’t be a good week if I didn’t have something to complain about) is how many people (entrepreneurs, VC, executive management, etc.) reference “Blue Ocean” without understanding the key concepts (and value) behind it. I have found the book Blue Ocean Strategy by W Chan Kim the most useful business book I have ever read (the most enjoyable was Dan Ariely’s Predictably Irrational).

Developing and implementing a blue ocean strategy involves four crucial actions: eliminate, raise, reduce and create. These are changes to your existing product or a way a market segment is approached. To put it in the context of social gaming (hence, the title of this blog), let’s say you found a market segment you considered underserved, for example teen agers. To pursue a blue ocean strategy targeting this segment

the first step would be to eliminate. As teenagers are generally more tech savvy than typical social gamers, you might eliminate tutorials.

The next step is raise, that is increase something in the product so it appeals more to this segment. Since teens are more comfortable with traditional gaming, you might increase the Player vs Player (PvP) elements and add IP that is popular for teens.

The third step is to reduce. In this example, since you are increasing the use of IP, you can probably reduce your performance marketing (Facebook) ad spend.

Finally, you need to create, that is add in new functionality for the target audience. If you are creating products for the teen market, maybe you would add in chat and music features, since they are both quite important to this market.

Above is how you should attack a potential opportunity to create an effective blue ocean strategy. Unfortunately, what most companies and investors think of when they refer to a blue ocean, is finding a market where there is not competition. The problem with this simplification is that you usually create an offering that is easy for others to compete with (hence, turning it quickly into a red ocean) or one that your competition beats you to (there are other issues also too but I don’t want to overly bore you).

There are no shortcuts when developing strategy. Taking the simple or fastest way will usually lead to an undefendable position or just failure. If you do take the time and energy, however, to go through the steps to create a real blue ocean, you are on the path to become the next Zynga (which did it in the gaming space) or Spotify (which did it in the music space).

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Lloyd Melnick

This is Lloyd Melnick’s personal blog. I am EVP Casino at VGW, where I lead the Chumba Casino team. I am a serial builder of businesses (senior leadership on three exits worth over $700 million), successful in big (Disney, Stars Group, Zynga) and small companies (Merscom, Spooky Cool Labs) with over 20 years experience in the gaming and casino space.